Some of the country’s biggest mortgage lenders have been named as defendants in a lawsuit filed in New York. The plaintiffs, who claim to be victims of an elaborate Ponzi scheme, hope to have their loans canceled.
Jacob Zamansky, principal of Zamansky & Associates, has filed a lawsuit in the Supreme Court of the State of New York, County of Nassau, against PHH Mortgage Corp., First National Bank of Long Island, Countrywide Home Loans Inc., Homecomings Financial LLC, Washington Mutual Inc. and Indymac Bank, and others.
The lawsuit seeks the cancellation of loans to elderly borrowers who were allegedly victims of a Ponzi scheme orchestrated by Peter Dawson and are in danger of losing their homes. Pending trial, the complaint is asking for a judgment ordering all the lenders to terminate and freeze any action to collect or foreclose on the loans or mortgage-backed lines of credit of 24 borrowers.
While Dawson masterminded the scheme, the lenders “themselves, or through their attorneys or agents, aided and abetted Dawson’s fraud and breach of fiduciary duty; issued unsuitable mortgage loans that should never have been approved; permitted loan proceeds to go to Dawson or his company [BMG Advisory Services’] ‘Disbursement Account’; and violated numerous standards of care within the Industry,” the complaint alleges.
“We believe it is the first court case to argue ‘suitability’ standards, much in the same way brokers must put their client’s assets in suitable investments,” Zamansky spokesman Jeff Richardson wrote in an e-mail to MortgageDaily.com.
The plaintiffs are asking the court “to adopt and impose a ‘suitability standard’ which would require mortgage lenders and brokers only to recommend and provide mortgage loans that were ‘suitable’ to borrowers in light of their financial condition and ability to pay the mortgage.” This standard is similar to the “suitability” obligation in the securities industry, also known as the “know your customer” rule, which governs dealings between investment advisors and stockbrokers and their clients.
“Under the mortgage suitability rule, banking professionals and mortgage brokers are required to assess whether a borrower has the ability to pay the loan and whether the mortgage product is suitable for the borrower,” the complaint reads.
The suit alleges that two mortgage brokers, Oasis Mortgage and Custom Capital Corp., which originated or qualified the borrowers on behalf of lenders received payments ranging from $2,000 to $10,000 at closings. The payments legally establish the brokers were “agents” of the lenders. In undertaking to qualify the borrowers, the brokers assumed both contractual and fiduciary obligations to recommend and qualify borrowers for mortgage loans and products suitable and appropriate for them.
Dawson, a “once high-flying ‘investment advisor’ who is currently in jail awaiting trial on grand larceny charges” for allegedly bilking investors out of a collective $100 million, convinced unsophisticated retirees to surrender their existing variable annuity policies and mortgage their paid-off homes so that he could invest the proceeds in new annuities on their behalf. He promised the new annuities would pay a higher rate of interest than the mortgages and that his office would pay the monthly mortgage bills.
The mortgage borrowers, most of them over the age of 60, all had their loan proceeds stolen and are either in default or expect to be in that status soon due to insufficient income. Most live on fixed incomes, such as social security and pensions, and lack the income to pay the monthly mortgage, and other necessary living expenses, according to the lawsuit.
Instead of investing all the proceeds that were deposited into BMG’s account, Dawson used about $100 million to maintain his lavish lifestyle, according to Zamansky’s statement. The suit said Dawson paid the mortgages for a short period of time up until funds ran out.
According to the complaint, one closing attorney with 18 years’ experience concluded that the mortgages were unsuitable and that warnings signs of fraud were ignored.
The lenders “should never have approved or qualified them for these loans without verification of income, ability, means and willingness to repay the loans,” the suit continued. The borrowers “have little-to-no cash, savings or funds to make the monthly loan payments. Dawson stole their loan proceeds and absconded with much of their life’s savings and investments.”
Additionally, in six to eight of the mortgage closings, the lenders were represented by Ida D’Angelo, who has been indicted for a $10 million mortgage fraud, or Orlando Morales, her junior associate at the time who has not yet been indicted but reportedly sent D’Angelo an internal memorandum inquiring about “fake closings” they conducted, according to the complaint. The indictment against D’Angelo reportedly does not pertain to her activities involving Dawson’s clients.
While the lenders were allegedly represented by an attorney who had been indicted for mortgage fraud or her former junior associate, “none of the borrowers had independent legal representation at the closings, of which nearly all were at Dawson’s office, and none were provided with their loan closing files.”
“Due to the circumstances of the mortgage loan irregularities and the failure of the mortgage lenders and brokers to provide them with disclosures and complete copies of their loan files,” the three-day right of rescission “has not run,” the complaint continued.
In many instances, the lenders or their closing representatives issued loan proceeds checks directly to Dawson, his company’s account or knew the proceeds were being turned over to him, the complaint read. In one case, Homecomings’ attorney allegedly issued its loan proceeds check of $450,831 directly to BMG.
“Homecomings Financial does not condone mortgage fraud and is committed to working with the attorneys representing the borrowers in this matter,” the GMAC-RFC unit said in an e-mail statement to MortgageDaily.com. “We intend to resolve this matter as quickly as possible.”
Requests for comment from all other lenders were not returned before press time.
The Mortgage Bankers Association and the National Association of Mortgage Brokers both oppose the imposition of suitability requirements because such would rollback advances the mortgage industry has made in fair lending gains and take away the right of consumers to be the ultimate decision maker in what loan best fits their individual circumstances.
In addition to the closings at Dawson’s office and borrowers having no legal representation, another warning sign lenders should have noticed was his U4 form, an “easily available” document that lists previous charges against a broker, contains four consumer complaints, including an allegation that he induced a customer to obtain a mortgage to invest in an “unsuitable” annuity, Zamansky’s statement indicated.
“Granted, it’s quite possible that none of the lenders knew that Dawson was absconding with the monies they advanced, but they had plenty of reasons to be suspect of him,” the statement read.
The complaint said that borrowers have made formal requests to the lenders for voluntary forbearance or a temporary freeze or standstill of their mortgage loans. To date, none of the lenders have agreed to any voluntary stay or “standstill” which necessitates court intervention.
The suit claims the loans should be declared “legally void and unenforceable because they were procured by fraud and/or they are unsuitable or unconscionable,” and lenders and brokers should be held liable for the damages of the stolen loan proceeds based on their “aiding and abetting Dawson’s fraud.”
“The Dawson case underscores why Congress should impose suitability rules on all the nation’s home lenders,” Zamansky’s statement reads. “If a declaratory judgment is granted, it will establish a valuable legal precedent and put irresponsible mortgage lenders on notice that they will be held legally accountable for their wrongdoing.”
